Tuesday, April 19, 2011

The great real estate bust of the 21st century

Negative population growth in much of the developed world through 2050 means that residential real estate prices will have a long term negative trend.

For example, the Population Research Bureau predicts (pdf) that Japan’s population, now around 127 million, will shrink to roughly 95 million by 2050. This is due to the aged population with below replacement fertility. Assuming a household size of 3 persons, this would amount to a reduction in housing unit requirements of roughly 10 million units, or about 250,000 units per year between now and 2050.

Other countries with significant population loss to 2050 forecast by the PRB include:

Germany – decline from 82 million residents to 72 million residents

Russia – decline from 142 million residents to 127 million residents

Ukraine – decline from 46 million residents to 35 million residents

Poland – decline from 38 million residents to 32 million residents

Many other countries in East Asia and Europe are forecast to have roughly zero population growth during this time frame. This suggests that in these areas real estate will be at best a non-factor in GDP growth.

22 comments:

Anonymous
said...

This is all nice and good, but you somehow assume that it is now enough housing in all those countries and that there are no other trends.

a) this is not true for many developed countries (like the UK, for example) or developing countries (definitely not true for Russia, where a significant proportion of population lives in the households with three generations under the same roof)

b) what about more and more people in the developed countries living in one-person households? this trend surely continues and will spill over to the developing countries.

if there is not currently enough housing, that means property now is going for a premium price to reflect this, and will thus fall to "natural" rates when the population falls enough so there is a balance between population and housing.

Furthermore, as you point out, when three generations live under one roof, you generally have a larger source of income per house, this also will tend to bump up the price these larger families are willing to pay for the housing than otherwise. In other words, for these people to move out of the bigger households and make their own, housing prices have to have already fallen significantly.

As for the single person households, again, this puts a constraint on time to upkeep, and also time for earning power to buy and maintain the house, and again is likely to explode only if housing costs continue to fall.

So I think all the trends you point out are not going to do anything to reverse the probable slow decline in property values over the next few decades.

In some areas there will of course be a free fall of real estate prices but the hot spots will still be hotspots and a shrinking population may make the them even hoter in countries like Japan and Germany.

People dont like to live in dying cities so they will move to the growing ones and push up real estate prices there.

I agree to a point. But a house is not a house. In most advanced Western nations, people don't necessarily pay so much for the actual value of the house itself, but also the neighbourhood -- especially in large cities.

So, will real estate deflate? Yes, probably. But not where it counts. The nicest neighbourhoods in the best places will be like a 'club' which is very hard to get into, i.e. high real estate value and costs of living.

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if there is not currently enough housing, that means property now is going for a premium price to reflect this, and will thus fall to "natural" rates when the population falls enough so there is a balance between population and housing.

You assume that there are only two variables here for some sort of an equilibrium - population and number of housing units. Clearly there are several more, for example - changing social habits- economic growth (which influences the housing needs)- public policy (social housing or policy towards property developers)- interest rates and the affordability of mortgages. prices don't need to fall - the market might just stand still with very low volume (see UK at the moment). This has a tricky inter-relation with economic growth. If you have an obvious solution - please advise Mr Bernanke and Mr King.

You also don't factor constraints - the "equilibrium" might well be outside the available parameter region due to the construction rules (again, see UK and the "green belts").

when three generations live under one roof, you generally have a larger source of income per house?? No, they might just simply very poor and can't afford any other option.

As for the single person households, again, this puts a constraint on time to upkeep, and also time for earning power to buy and maintain the house, and again is likely to explode only if housing costs continue to fall.

I am not talking about the explosion, only about counter-trends. It's not necesserily about the earning power in the future - look at all the baby-boomers (for example, in the States). They are retiring now and the richer ones are expected to live for quite a while.

Also, the prices are affected not only by buying prices, but by rents as well.

In some areas there will of advance be a chargeless abatement of real estate prices but the hot spots will still be hotspots and a shrinking citizenry may accomplish the them even hoter in countries like Japan and Germany.

Many added countries in East Asia and Europe are anticipation to accept almost aught citizenry advance during this time frame. This suggests that in these areas absolute acreage will be at best a non-factor in GDP growth.

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